a Consider the following stocks:

Stock A is expected to pay a dividend of 4 next year and then an annual dividend of 5 from the following year, forever.

Stock B is expected to pay a dividend of 4 next year (t=1) with dividend growth expected to be 10% per annum for the next three years (t=2, 3, 4) before settling down to 4% a year thereafter (t=5 ...).

If the required return on similar equities is 8%, calculate the price of each stock.

b You are given the following information:

(i) A stock with a beta of 0 has an expected return of 4%.

(ii) A portfolio made up of 30% invested at the risk free rate and 70% invested in the market portfolio has an expected return of 15%

What is the market risk premium?